Everything you need to know about liquid assets: Definition, calculation, balance sheet

Definition: What are liquid assets?

Herkunft und Bedeutung des Begriffs "liquid assets"

The word "liquid" comes from the Latin liquidus, fluid. In a business context, it describes exactly that: how quickly can you access your capital when it matters?

Liquid assets are all assets of a business that can either be used immediately as a means of payment or converted into cash at short notice. Whether it's salaries, supplier invoices, or an unexpected investment opportunity: in all of these moments, what counts is what is actually available right now. Not what looks good on paper.

Liquid assets, cash equivalents, liquid wealth: what's the difference?

These three terms are often used interchangeably, but they mean different things.

Cash and cash equivalents is the legal term under German commercial law (HGB). It refers exclusively to what is immediately available: cash on hand, bank balances, and cheques. More on this in the balance sheet section below.

Liquid assets is the broader term used in business. It includes cash and cash equivalents as well as assets that can be converted into cash in the short to medium term: receivables, securities, and inventory.

Liquid wealth is more commonly used in a personal finance context and refers to all assets of a person or business that can be quickly liquidated, including daily savings accounts or publicly traded securities.

For day-to-day business, cash and cash equivalents are the hardest measure: they show what is sitting in your account today and can be spent tomorrow. If you want a more realistic picture of your headroom, including receivables expected in the coming weeks, you work with the broader concept of liquid assets. Not all of these assets become available at the same speed: depending on how long it takes to convert them into cash, they belong to one of three tiers.

Which assets count as liquid assets?

The three tiers of liquid assets sort assets by how quickly they are actually available, from immediately to medium-term.

1st tier liquid assets: immediately available

This includes everything that can be used without delay: cash in the till and balances on current and daily savings accounts. What is in your account today, with no waiting time, no detours.

The first tier largely overlaps in practice with what most people mean by cash and cash equivalents. The subtle difference: cash and cash equivalents is a legally defined term; the tiers are a management accounting concept.

2nd tier liquid assets: available at short notice

This covers assets that can be converted into liquidity within a few days to weeks: uncashed cheques, discountable bills of exchange, short-term securities held as current assets, and open receivables from the supply of goods and services.

The key difference from the first tier is the time factor. The money is essentially there, it just hasn't arrived yet.

3rd tier liquid assets: available in the medium term

Inventories, raw materials, auxiliary materials, and semi-finished goods. They can be converted into cash, but only with effort and time. They play virtually no role in day-to-day payment capacity. If you need to pay a supplier tomorrow, you can't liquidate stock quickly enough.

What are non-liquid assets?

Anything that can only be sold over the long term or with considerable effort is considered non-liquid: machinery, vehicles, real estate, patents. They form the fixed assets of a business, valuable, but not quickly available in an emergency.

Are receivables liquid assets?

Yes, but with an important caveat. Open customer receivables count as 2nd tier liquid assets, as long as their collectability is realistic and the payment is expected within a foreseeable timeframe. What many businesses underestimate: anyone who counts uncertain or overdue receivables as available is overstating their liquidity, and often only realises this when their own invoice can't be covered.

Calculating liquid assets

The formula for calculating liquid assets

Determining your current stock of liquid assets is straightforward. You add up all immediately and short-term available assets:

Liquid assets = Cash on hand + Bank balances + Short-term receivables + Short-term securities

A concrete example: Sarah runs a graphic design studio with three employees. Her business account holds €8,400, and there's €200 in the till. She also has two open invoices: one for €3,200 due in ten days, and one for €5,600 due in three weeks. Her current stock of liquid assets is therefore €17,400.

But that number alone doesn't say much. €17,400 sounds solid, but if salaries, rent, and a tax payment totalling €19,000 are due in the same month, it won't be enough. The crucial next step is therefore comparing this figure against your short-term liabilities.

Calculating liquidity ratio 1: putting your position in context

The liquidity ratio 1 helps you understand the status of your liquid assets by measuring them against your liabilities:

Liquidity ratio 1 = Cash and cash equivalents divided by short-term liabilities multiplied by 100

It shows what percentage of your short-term liabilities you can cover using only what's in your account today, without waiting for customer payments. The benchmark is 10 to 30 percent, depending on your industry. That sounds low, but it's normal in practice: businesses don't hold capital idle, they put it to work.

The second and third liquidity ratios work on the same principle but also factor in receivables and inventory. For a first overview of your liquid assets, the first ratio is enough.

How much liquidity does a business need?

The rule of thumb: as much as necessary, as little as possible

You now know the benchmark: 10 to 30 percent. What that means in practice: a trades business with €20,000 in the account and €80,000 in short-term liabilities has a liquidity ratio 1 of 25 percent, which is a healthy position. Not all invoices arrive at once, and customer payments come in continuously.

Too little liquidity: when does it get dangerous?

A common mistake is only recognising liquidity problems when things are already on fire. Your order book looks full, the numbers seem solid, but there's nothing in the account right now. A customer pays two weeks late, and at the same time salaries and a supplier invoice land. Suddenly it doesn't add up. Below 10 percent on liquidity ratio 1, your ability to pay depends entirely on customers paying on time, and in practice that rarely happens reliably, which is why solid liquidity planning matters even more.

Too much liquidity: why that's a problem too

Consistently holding well over 30 percent in the account without a specific reason, a planned investment or a seasonal buffer, means leaving capital sitting idle. Money in a current account earns no return and can't flow into growth or investment. Excess liquidity isn't a luxury problem, it's a sign that capital isn't being deployed where it would benefit the business most.

What to do when liquid assets run low

When your liquid assets start to drop, there are two directions you can take: bring money in faster or let money go out slower. In practice, both together work best to bridge a liquidity gap.

On the revenue side, consistently chasing open receivables is often the fastest lever for increasing liquid assets. On the cost side, it's worth reviewing which payments can be delayed and whether suppliers will grant extended payment terms.

When internal measures aren't enough or take too long to kick in, flexible financing can make the difference. The Banxware Sofortfinanzierung allows small and medium-sized businesses to apply for between €1,000 and €250,000 entirely online, in just a few minutes, without personal guarantees, and with funds disbursed within 24 hours of approval.

{{cta-checkmarks}}

Cash and liquid assets in the balance sheet

Many business owners spend a long time searching for where their liquid assets appear in the balance sheet. The entry is always in the same place.

In the balance sheet you'll find them on the assets side under current assets, right at the bottom as the last entry (B. IV.). The balance sheet is ordered by availability: what is hard to convert into cash sits at the top, what is immediately available sits at the bottom. Cash and cash equivalents are the most liquid entry.

What exactly belongs there: cash on hand, bank balances, and cheques. For most businesses, that means two things in practice: the cash in the business and the money in the business account.

What does not belong here: securities. Even if shares can be sold quickly, they are reported separately under B. III. And receivables, open customer invoices, appear elsewhere too. They are part of current assets, but they are not yet cash.

Valuation: nominal value, lower of cost principle, and foreign currencies

Cash and cash equivalents are recognised at nominal value. €15,000 in the account appears as €15,000 in the balance sheet.

Two exceptions are worth knowing. The lower of cost principle applies when a value is uncertain, for example a cheque from a customer with payment difficulties. It cannot be recognised at full value, only at the amount you can realistically expect to receive. Better to be cautious than too optimistic.

For foreign currency accounts: these must be converted into euros at the exchange rate on the balance sheet date. Exchange losses must be recognised immediately; exchange gains often cannot be recognised. This sounds counterintuitive, but follows the same principle of caution.

{{cta-newsletter}}

Summary: liquid assets

Liquid assets are not the same as revenue or profit. They show what a business can actually pay today. The three tiers help you understand how quickly individual assets can really be converted into cash; the liquidity ratio gives you a concrete benchmark. Anyone who understands both has a solid grip on their business: they don't overestimate their ability to pay, they spot gaps before they become problems, and they can take corrective action early.

_Sources:

_{§ 266 Abs. 2 HGB — Gliederung der Bilanz, Aktivseite}

_{§ 256a HGB — Währungsumrechnung bei Fremdwährungsposten}